How much should I spend on a new house?

jockewingNovember 10, 2012

I am looking at the possibility of getting a new home. The home i live in is a small starter home that is rather nice as far as starter homes go. I got it after first moving out of my parent's home after going to work at my first job. Bought it about 11 years ago for 86,500. I owe about 70,000 on it and the house right next door that is almost exactly the same sold for a few months ago for about 120,000. So, after realtor costs I'm looking at about 40,000 in profit that I'm willing to put into a new home. I have liked my current house and it's not like I'm desparate to get out of it. The payment is quite affordable. It's just that it isn't the greatest immediate area, it doesn't have a garage, and it has well water (which I am quite tired of).

There is a new development in my city that is quite nice and the homes are all being built mostly by one developer that offers a choice of several different plans. There is one particular plan I really like that is about 2,000 sq feet, which is plenty big for me. The house offers nice add-ons such as wood floors, crown molding, granite, etc., and they seem to be well built. It is almost like the "dream" home in my realm of possibility. The asking price is 215,000. I don't know how far down that can be negotiated or not.

I have about 350,000 in cash and investments (not retirement) that I could tap into to make a down payment. I am thinking if I made a downpayment of about 65K or 70K, I could get this house at a payment of about only 100 or so over what I'm currently paying, if I were able to get one of these great 3.5-4.0% rates everyone is talking about. I just ran my free credit report and I have about a 740 score. I have no debts at all other than my current mortgage. I make about 60K in my current job that I've been at for over a year and a half. On paper it looks like I easily have the money to do this, and now would be the time to take advantage of the rates and get into a much nicer house for only a small and affordable increase in my monthly payment. Once my house sells and I re-invest the profits, I'll have only used about 30K of my savings. But there is also the issue of what if my house doesn't sell right away and I've got 2 mortgages? I can definitely afford to pay both for quite some time, but do I want to? I have been told that small starter homes like mine usually sell quite easily, though.

Most of this savings I have came to me through a family inheritance, so it's not like I make enough salary to ever save something like that again anytime soon, which makes me very leery to touch it. But then I also wonder if now is my best chance to make the move to a nicer home. This new home would well suit me for years and years as I am single and don't plan on having a family any time soon. I just get the feeling that now Im in my mid thirties and it's time to move out of this starter home.

Please give me some advice--would you use the savings to make the big down payment and take advantage of these rates to get a house I'd be happy in for a long time into the future?

There is also the possiblity of looking at older homes in my area. Unfortunately, it seems like the entire availabilty in my area any lower than the 200K range is just not anything I really want, at least based on what I've seen online. If I am going to make this move, I want to move into something I really want. I want something either new or updated, and it doesn't seem like there's anything in my area that meets those criteria. Of course I'll go look with an agent and might be surprised. I would certainly be more comfortable getting something in the 170-180K range so I wouldn't have to tap as much into my savings. But is the extra 30K for something I really want worth it? Should I settle for something I don't really love when I am making a move like this? Buying a new home is certainly something I don't plan on doing more than once in the near future.

If you have all that cash available, can't you just pay cash for the new house? Unless you can earn 3-4% on your investments, you're best to pay debts to get ahead financially. If you plan to stay in the area (= not sell for years) and the housing is stable in your area, I don't see why not move to a house you like better. Can you pay off your current house and take your time to find a new one? (you only paid off $16,500 in 11 years? I assume you're in the US and there was no 20% downpayment required) Of course, DO NOT buy a new house until your old one is sold, and $ are in the bank.

Selling a house is a huge PITA, at least, it's been that way each time I've done it (3x). I personally wouldn't move unless I really wanted to - REALLY REALLY wanted to :)

So, if you are happy enough in your current house I say why not stay? A bigger house means more upkeep (cleaning) and usually higher property taxes and more money on everything. A new house comes with lots of little expenses that add up - window coverings and landscaping and needing new furniture because the old stuff doesn't fit ... You get the idea.

Now, well water can be annoying. Have you looked into a whole house filtration system or softener? I'm guessing that's the thing that bugs you about the well.

In short, I wouldn't move just because I thought I was hitting the age when I should move. If I found a house I LOVED and felt giddy about, then maybe. But not because I hit a certain age.

Well, all the money isn't just sitting there as cash. About 170,000 is cash and the rest is in mutual funds/bonds at an investment firm. So I don't want to spend more than half of the funds I have to pay off a house. I always had heard that due to liquidity, you shouldn't put so much of your net worth into a home. That money I have in the investments is also earning a nice little return each month, which I am currently reinvesting as it is earned. It gives me a great sense of security to have all of this available to me in case of emergencies.

About the bigger house being harder to clean---in a way that is true, but I have found with living in a house this small that it gets cluttered and messy so easily! I have 1325 feet, but I also really enjoy decorating so I love collecting nice furniture, art, etc., and I am out of room in this house. There are also certain things about this house I don't care for like the floor plan, how the living room windows don't have much of a view, the incredibly small amount of kitchen counterspace available. This new house would solve those problems. The neigbhorhood I live in is also not that great--I have never really had problems, but it is a transitional area and there are some trailers scattered here and there.

So I'm not just wanting to move because of reaching a certain age, really.

Although your financial picture sounds pretty good, it is concerning that your primary residence hasn't been paid down more in the time that you've owned it. It sounds as though you got into your current house and habits before you inherited the money? Perhaps there is an element or two of your money behavior that you might want to re-examine, based on having such a small paid down equity in your current home.

I'm in agreement with those who say that moving because you've got a couple of small issues with your current residence, and a vague feeling of needing change isn't really the best motivation for changing residences. 1300 square feet for a single person is a LOT of space. Really. If you have "space problems" with stuff with 1300 square feet, then you'll continue your current habits and have space problems with even 3000 square feet. That is also another area of your behavior to self examine. Having more room can just mean more room for more stuff that you don't really need, less actual room for you, and higher utility bills to take care of it all.

Really, moving to another home will cost you a LOT more than "just" $100 a month. There are a lot of hidden expenses that you aren't accounting for. I would only do this if you found a house that you LOVED, regardless of if you or your friends feel that it's time to "upgrade" your residence. You'll spend 5 years recovering from the money you spend to move, so when you do move, make it count.

1325 may seem like a lot for one person, but have had roommates and family members living with me even recently, so I'm not always alone. Also you have to consider that almost half of this house is two extra bedrooms and a bathroom that I hardly even walk into.

As to what I have paid down on this house, I bought it with 3% down when I was just starting out, and have been making the payments every month. I mean it's just a function of time. The first 10 years are mostly interest. I thought about paying it off when I inherited this money two years ago, but people advised me against it due to liquidity issues as I mentioned. Don't know if that was the right move or not.

There really won't be that much spent to move as it would be in the same town and have family to help.

Your current equity is not entirely a just function of time. It's only that if you always only pay the minimum payment. An extra $100 per month would have had the house almost paid off by now. That is what I mean by being concerned about only having a small amount of paid equity in the home. It's a function of financially passive behavior. As in, what would your money picture look like had you not had the inheritance? That is what you need to examine here.

It sounds as though you've made up your mind to move. But do look at the whole costs of the entire "move up" mentality. Marketers invented the term "property ladder" to entice people to be dissatisfied with their current home and to spend money in acquiring a new one. Be sure that the extra amenities and additional monthly carrying costs are truly worth it to your long term financial picture.

With that nest egg invested, and paying an extra $100 a month to get your current home paid off, and then using that mortgage amount to fund your retirement accounts, you could be looking at taking an early retirement and traveling. Or any number of things that you'd like to do. Rather than having to keep working to pay off a residence.

What is your long term goal? And why does it involve moving to another home at this juncture in your life?

I suggest you try playing with one of the mortgage calculators you can find online. For a $215,000 house, if you borrow $150,000 at 3.5% interest, on a 30 year loan, your interest payments will add up to $92,484, for example. If you pay that off in 15 years instead, your total interest payment is $43,018. How else can you so easily save $50,000?
Also consider what is the advantage of liquidity? Do you anticipate losing your job & needing the cash to live on?
My recommendation would be to at least pay off more of the loan on your current place; or if you want to move to get out of that neighbourhood, to at least make a bigger down payment on the new place.

My suggestion is to speak with a mortgage broker and try to get preapproved/prequalified for a mortgage so you know how much $ you can borrow and what the costs and payments would be. Even if you do not want to go all the way through the process, they can tell you if it sounds like you will be approved and tell you interest rates and payments for various loan amounts.

You need to have all of the costs/expenses in front of you to make the best financial decision for you.

Go look at the new houses as well as "used" houses in your desired locations to get a better sense of what would make you most happy. For the difference in price you described, you should go with what you like best. But ask a realtor their opinion on resale, and take a friend or family member to get a different perspective (so you don't get so excited by some feature of the house you forget to notice the railroad tracks or ? nearby).

When you have the actual loan costs/payments, you can play with the numbers of a purchase with a minimum down payment versus a big down payment or even a cash purchase.

I agree with previous commentors that it would be a good idea to pay much more ahead on your mortgage loan if you get one. There is not a good reason to be paying so much interest when you have cash sitting there. It sounds like 170k cash is an awful lot of your portfolio to have in cash.

For myself, we could qualify for a more expensive home then we are buying. We looked at houses in a variety of price points. We could have found something we could have easily lived in for even less $, but is seemed a little more expense buys us a lot more house, even though it is below what we are "allowed" to borrow. So you just have to look and see what works for you.

You were very wise to sit on an inheritance and not blow it right away as many people do!!

I suggest an investing website called www.bogleheads.org for very useful investing advice that is not get rich quick. They have a section where you can post this exact question for them to answer from a $ perspective.

Since it sounds like you can get a new home before selling the old, you have a lot of choices. How exciting!

I mean this kindly: why would you ask strangers on an Internet forum how much money you should spend on a home? This decision is part of your overall financial and retirement plan. You need to sit down with a good accountant and/or financial planner to map out a strategy that makes sense for you and your overall situation. I doubt you would find anyone who would advise you to sink half your available fiends into a house!

kswl, of course I am not going to rely solely on the opinions here, but I do find it is an effective place to get other perspectives from like-minded people, and helps me to think about angles I might not have considered. I really appreciate what a good resource these forums are. I mean you could say the same thing about every post on this forum--

Well yesterday I went to look inside houses in the new development with one of the representatives. The houses were nice enough, but I really did not get that feeling like I loved it. The floor plans I liked the most still really didn't move me that much. I would have to wait until June as whatever I would buy would have to be built from ground up. There are only 3 lots available left before the whole place is sold out.

Also, there is NO negotiation on price--if you don't feel like paying the full list price, they aren't interested in dealing with you--at least that's the position the sales lady was taking. I was also rather disappointed in the available finish choices. There were about 10 paint colors, and you can not select your own colors! I love blue-grays, grays, greens, and there was not a single one of these colors available. Everything was a drab neutral. There was only one cabinet style available with just a couple of colors. The "base level" carpet is the absolute bottom of the barrel in quality, and the step up you have to pay extra for wasn't much better. The only countertop choice is about 6 different colors of the base-level granite. They also use the very thinnest slab. If you want to pay extra for quartz or marble or whatever, you're out of luck! The light fixtures used are very low-end. All door handles, hinges etc. and all plumbing fixtures are oil-rubbed bronze which basically looks black. There is no other option available--and I don't like ORB! Isn't it already on the way out? I would much prefer timeless chrome in bathroom and even a nice antique brass for door handles. The wood floors are actually laminate, and there are only a few colors available. When I inquired about running the wood continuously through the living room into the kitchen (which looks much better to me when the rooms are open to each other) I was told that is not an option. The lady said if the refrigerator leaks it could ruin the floor. Well at that point it would be my house! I think for the price I'm paying that should be something up to me to choose! I hate those ugly "divider" strips of wood where the wood meets tile. In the plan I liked the most, the whole living area floors was chopped up with these "dividers".

The overall build quality seemed quite nice, and the "bones" are good--all ceilings are 10 feet throughout, crown molding is used in alot of the rooms, nice double-hung windows, they even include tankless water heaters. I don't know if I am being unrealistic, but I just don't feel like spending all this money for a bunch of finishes I don't like. But I feel like if I am paying a premium for a brand new home, I shouldn't feel like I need to replace all the finishes.

To top it all off, when I got home I had a letter in the mail from my mortgage company informing me that my payment on my current home is dropping 50 a month as I no longer require PMI as I have paid down 20% of the original mortgage. Since I figured if I were to buy one of these new houses my monthly payment would increase about 100 a month, maybe I should pay that extra 100 to principal in my current house (which would mean 150 a month extra to principal with the drop in PMI) for a year or so to build up more equity in this house so when I do sell I'll have even more money available to put into the new house.

Of course I am going to go with an agent to see what's out there in existing homes, but from what I've seen online, there's nothing that would appeal to me. The inventory where I live is very cookie cutter and bland. Maybe I should look for a lot and have a truly custom home built so I can have the plan exactly the way I want and the finishes I want. I don't know what the prevailing price per sq foot is around here--it may be that it would cost a lot more than what this builder in the development is charging.

I guess what I am really worried about though is if I wait, will these great interest rates be gone? Will house prices increase even more to the point where I won't be able to afford anything? Maybe once I got all my furniture and decor in the new house in the development, I wouldn't even notice the little things that bothered me?

Decisions, decisions....for someone like me that is a "researcher" and a worry wart, life-changing decisions are very stressful!!!!

The think that stands out to me that is the only things you don't like about your current house is the location and storage. If you are considering moving I would start with narrowing down where you want to live and research that location and look for a location that has for years been a desirable one. A new development could go either way in the future, but generally a location that has been desirable for a long time will likely stay that way although nothing is guaranteed.

I would start looking at that location and also consider a light remodel. Ie something that needs cosmetics and maybe a small kitchen overhaul. This way you can get what color scheme etc you want and take advantage of the low current rates and get what you want. Also it is soemthing that could be done over time so you could still live there. Building is the other possibility like you mentioned.

Most tract homes today have faux good bones. 10 foot ceilings and a gabled facade don't make for a quality home. If you know about home construction, and watch them go up, you're pretty horrified. The insides aren't any better. Cheap berber or frieze and laminate floors and Chinese pre-fabbed slab granite "fabricated" by some poor carpenter who ruins a circular saw by trying to run it with a garden hose cooling the blade.

I could never buy a new home unless I built it myself. And that will run you twice the price per square foot of a tract home. Better to buy an older home from the 60's-70's where there are some modern sensibilities to the floor plans and construction, but that is still old enough to be built a bit better. You'll get mostly modern electrical and plumbing systems, and some level of insulation, which you won't get in most pre 1960 older homes. And a lot of the homes of these eras can be had fairly cheaply on the market.

But like anything in real estate, it's all about location. The same exact 1970 ranch house in Tulsa, Oklahoma, will cost you 1/3 what it would in a suburban Chicago neighborhood, which will again cost you one third what it would cost you in the bay area of California.

Great thread. It's interesting what you said about the newer development. It sounds like you would be living in their home. I wouldn't want to have to go with their colors and styles. I have a tiny cottage built in 1943. I recently tried to sell it, but ended up keeping it. I love antiques and have this one decorated in the style of the period. Right now I'm having the bathroom remodeled. I found some 1930's pink tile the I just love! Next year I will do the floor in white tile with a pink border. It's really fun to put your artistic stamp on your home. I have several brass antique lamps that add so much ambiance.
I would look at all of the older homes anyway. It can't hurt. Prices are great right now. I would also consider paying off your home completely and doing a small remodel each year. That's what I'm doing. It's very rewarding. Last year I bought a 1950's O'Keefe and Merritt stove and restored it. The year before I replaced the carpet with my favorite shade of green. Then I painted. Now it's the bathroom. Even though my house is old, I love the charm, and it feels so solid to me. Next year I'll repipe. I would definitely make sure you sell the first house before buying the second. Real estate offers can be iffy. People do back out. I learned that the hard way...

It is a bit unclear from your post, but if you have $350k on hand and paying more than a 4% on your mortgage of $70k, I would strongly suggest you consider paying off your current house completely (and/or maximizing deferred retirement savings).

This would leave you with a more than adequate emergency fund + downpayment for a future house if you decide to purchase.

Well I have given my information to a lender and am supposed to be hearing back tomorrow to find out what kind of rate I will be able to get. At least then I will be able to better know what my options are.

At this point I am leaning away from purchasing right now. My current house really is sufficient--a new house is much more of a want than a need. I really need to be making a better income to support a higher payment and the associated increased needs of a new house. I think I am going to stay in this house for now and start paying extra each month towards my mortgage. Maybe in a year or two I'll be making a significant amount more money and will have gained a lot more equity in my current house.

The thing that makes me nervous is I wonder if I don't do this now am I missing out on a once in a lifetime chance to take advantage of these amazing interest rates--not to mention the buyer's market that exists right now?

Interest rates are low, but owning a second home is very expensive. You have two of everything: property taxes, utilities, water, trash, repairs, etc... I have students who own two homes. Many of them took out the equity from the first home to buy the second. Now they are underwater. They have good jobs, but they are overextended. It's very stressful. The only way I would do it is if you could afford to own both homes outright. I'm very conservative with how I spend money. It can be difficult to sell a home, too.

Well the lender said I qualify for 3.25%, just about the best possible right now. It is very tempting.

I just got 2! sex offender notifications for people moving into my current neighborhood!! Yogastef, I wasn't planning on keeping both houses. I would have several months to sell my current house as it would take about 6 months to build the new house I'm interested in.

That's why I was going to move, too. (The neighborhood.) Have you sold a house before? This is my first house. I put it on the market twice before, but because it is so old, the realtor was worried about the appraisal being low. When I saw what I could buy with the money I would make on this one, I decided to stay. The remodeling has been a happy compromise for me. I'm going to continue to do all the repairs, termite work, etc...

It might be very tempting (with a low interest rate), but the new houses don't sound like they are for you in either case. *If* you move, find a neighborhood you like. Otherwise (you haven't said what your current interest rate is), pay off your current house. You maybe should do that anyway (even if you plan to move) to save on the interest you are currently paying. If you aren't making more in interest or dividends with your inheritance than you are paying in interest on your mortgage, this is the way to make your money do more for you right now. Similarly, if you have any other debt with the interest rate higher than what you are earning with the cash on hand, pay that off.

(ie, if you have a 4.5% mortgage, but are earning 2% on the "cash", you should pay off your mortgage. It is the way to make that money work at 4.5% instead of just 2%).

Then, you can take your time to figure out where you want to go, and save what you are paying in P&I on a monthly basis (do NOT spend that money just because you aren't paying a mortgage anymore).